As Candidates Warm to Bush Tax Cuts, Economists Warn of Long-Term Effect

By Lori Montgomery
Washington Post Staff Writer
Friday, March 28, 2008

When President Bush pushed big tax breaks through Congress in 2001 and 2003, Sen. John McCain (R-Ariz.) joined Sen. Hillary Rodham Clinton (D-N.Y.) and other Democrats in opposing them as fiscally reckless. But now that McCain and Clinton are running for president, neither is looking to get rid of the cuts. Instead, they are arguing over which ones to keep.

The same is true of Clinton's rival for the Democratic nomination, Sen. Barack Obama (Ill.), who recently blamed the Bush tax cuts for driving the nation toward recession. But he, too, wants to preserve about half the cuts, and pile on new ones.

The direction of the tax debate is frustrating deficit hawks in Washington, who worry that none of the candidates is charting a course toward a balanced budget. Meanwhile, Bush and other politicians are telling voters alarmed by a sagging economy that keeping the cuts past their 2010 expiration date can help revive the nation's fortunes, a claim many economists say is nonsense.

Far from acting as an economic tonic, the tax cuts "are neither sustainable nor beneficial" without massive cuts in government spending far beyond what Bush or any candidate to succeed him has proposed, said Alan D. Viard, a former economist in the Bush White House who is a resident scholar at the American Enterprise Institute. The most popular cuts -- those known as "middle-class" tax cuts -- are more likely to slow economic growth than promote it, Viard and others said.

"Those are the provisions that detract from long-term growth even if you finance them with a reduction in government spending," said Robert Carroll, a former Bush Treasury official who teaches at American University. "If you pay for them with future tax increases, I think that would be awful."

The tax cuts, the signal economic achievement of the Bush administration, are among the three biggest federal tax reductions since the end of World War II, comparable in size to the Reagan tax cut of 1981 and the Kennedy tax cut passed in 1964, according to the nonprofit Tax Foundation. By the time the Bush cuts are scheduled to expire, it's projected that they will have saved taxpayers $1.6 trillion.

The cuts affected both businesses and individuals. The individual cuts, which are the focus of the current debate, are split into two main elements.

The first, growth-oriented provisions, are aimed at spurring the economy in the long term and flow mainly to the wealthy. Those provisions lowered the estate tax and will repeal it in 2009, and lowered the tax on capital gains and dividends to 15 percent. The legislation also lowered the top four income tax brackets, with the top rate falling to 35 percent from 39.6.

The second element, social-relief provisions, are aimed at providing short-term stimulus and flow to a wider spectrum of taxpayers. Those provisions created a 10 percent tax bracket at the bottom of the scale, doubled the child-tax credit to $1,000 and reduced the penalty on married couples filing jointly.

The economic impact of the cuts is unclear. A recent report by the nonpartisan Congressional Research Service said "it is hard to be certain what effects the tax cuts have had on the economy because there is no way to compare actual events to the counterfactual case where the tax cuts were not enacted."

Conceived during Bush's 2000 presidential campaign as a means to return what were then huge government surpluses to taxpayers, the cuts were approved by Congress in the midst of a recession, which worsened after the Sept. 11, 2001, terrorist attacks. Though the recession was mild, the recovery was sluggish and hampered by a deep decline in employment. Productivity ultimately rebounded robustly, but national savings plunged, and the country racked up a large trade deficit.

Critics look at that record and say the cuts were ineffective. Advocates say the economy would have fared worse without them. Most analyses split the difference, finding that the cuts probably stimulated growth in the short run but reduced it over time.

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